Summing Up by the Acting Chairman
of the IMF Executive BoardInternational Standards and Fund Surveillance—Progress and Issues

Executive Board Meeting

September 8, 1999

Executive Directors welcomed the opportunity to review the staff’s experience of preparing assessments of members’ implementation of standards, and to consider further the role of standards in Fund surveillance. They again emphasized that some form of monitoring of countries’ observance of international standards would help strengthen the incentives to adopt and improve adherence to such standards. Monitoring would also assist countries in their efforts to implement standards, thereby contributing to strengthening the policies and the structure of members’ economies.

Directors remarked on the increasing attention being placed on standards by the international community, as evidenced by a number of recent proposals to use assessments of the implementation of standards in various ways. This suggests that the potential role to be played by standards in international surveillance is still evolving. Directors recognized that the development of standards, and the monitoring of performance against them, will be a major and complex task involving many parties, and entailing potentially large resource costs to the Fund. For all these reasons, they favored a gradual and interactive approach in guiding the direction and scope of the Fund’s future work on standards. The experience gained from preparing the country case studies was seen as valuable in suggesting the way ahead.

In reviewing that experience, some Directors remarked on the difficulties encountered by both national authorities and the staff owing to the tight time constraint on the production of studies, and by the newness and evolving nature of the process, noting that these factors may have acted to deter some members from participating in the exercise. They recognized that, as a result, there may have been a selection bias in the mix of countries that had participated in the first and second round case studies. It was agreed that the next set of case studies should be undertaken over a longer time frame—about one year—and that a large number of members should be encouraged to participate, including countries that may not be of systemic importance. Regarding developing countries, several Directors emphasized that it was important that the Fund and other international agencies provide the technical assistance needed to help them build their capacity to meet international standards. These Directors considered that this important issue merits further careful reflection.

While all Directors encouraged further experimental case studies, a few cautioned that Fund involvement in preparing and publishing assessments could conflict with the Fund’s role as confidential advisor to national authorities. Many Directors indicated that there was a risk that reports could be perceived as providing ratings of countries, and could create the impression that the Fund was assuming the role of a rating agency. Concern was also expressed that there may be insufficient appreciation of the detail in, and differences between, standards. Care was therefore needed to minimize misinterpretation. It was also stressed that for assessments to be credible, they needed to be comparable across countries.

Directors generally agreed that the credibility of the reports also depended on assessing the quality of information released. Some appreciation of its integrity and underlying quality was critical for understanding members’ practices, and in determining the implications of those practices for financial systems. However, while agreeing that, to be effective, monitoring needed to go beyond disclosure practices, Directors emphasized that reports on the implementation of standards could not be viewed as analogous to public audits of company financial statements. The primary focus should be to assess whether each country has in place an effective system to ensure quality, recognizing that quality issues are addressed to different degrees in each standard.

Directors welcomed the adoption of a step-wise, modular approach to the construction of a comprehensive report on a country’s observance of standards. Compared with the simultaneous assessment of all relevant standards—which Directors generally agreed was not feasible—the modular approach has a number of advantages. By staggering the workload, it would help ease resource demands on both member countries and Fund staff, and allow efforts to be better focused on priority areas within and across countries; it would permit the individual nature of each standard to be reflected more accurately since it would not impose a unified framework on inherently different standards; and it would facilitate better coordination with technical assistance activities and other architecture initiatives under way within the Fund. In addition, it would provide a suitable and flexible mechanism with which to incorporate information on standards into the surveillance process. Finally, it would assist in coordinating scarce expert resources across the various institutions involved in the preparation of reports on standards.

Directors viewed the response of the private sector and international bodies to the staff’s initial outreach program as useful. While private sector participants had expressed mixed views on the value of the first round case studies for their daily operations, they had generally viewed the development of the framework to assess the implementation of standards as an important step in improving the quantity and reliability of information, and consequently in strengthening financial systems. Directors encouraged the staff to conduct further outreach as additional reports are released in order to gauge better the value and appropriateness of the evolving approach. Some Directors stressed that the mixed response of the market to transparency reports did not detract from their primary benefit to the countries being surveyed, which was to provide a benchmark for policies.

Directors believed that reports should not be couched in "pass or fail" terms with respect to the implementation of a given standard. They believed a more appropriate approach was to characterize a country’s progress in implementing a standard in terms of the elements that have been met and those that have not, together with a description of the member’s commitment and plans to achieve further improvement. This would allow for consideration of the diversity of members’ economies and administrative capacities, and would treat the assessment of a country’s implementation of standards appropriately as "work-in-progress". In light of this, it was generally agreed that some change in the name of the studies was appropriate to reflect their role in monitoring the implementation of standards and codes, with some Directors having a preference for retaining a reference to transparency. We will come back to this issue in due course.

On the allocation of effort to core and non-core areas, a number of Directors noted that the range of core issues had been expanding over time, and, furthermore, could vary from country to country. In view of the substantial resource costs involved, but also the Fund’s lack of expertise in non-core areas, Directors considered that the Fund should focus primarily on the core issues for which it will have a central responsibility in the preparation of reports—data dissemination, fiscal transparency, monetary and financial policy transparency, and banking supervision. Even within these areas, the Fund should coordinate, as necessary, with the World Bank and other standard-setting agencies. For non-core areas, most Directors recommended a "shared ownership" approach that would involve other institutions taking primary responsibility and being accountable in non-core areas. Some Directors, however, considered that the Fund should not venture at all into non-core areas.

Directors welcomed the involvement of the World Bank in the second round of case studies. They emphasized the importance of standards outside of the Fund’s core areas for the effective operation of financial systems, and stressed the importance of devising ways to make them subject to assessment. This could be achieved over time by inviting the Bank and other organizations to indicate a domain of responsibility for which they would prepare assessments. For those areas where the Fund and the Bank have overlapping mandates, such as banking supervision, Directors believed that assessments should be based on a clear understanding of the relevant responsibilities of the two organizations.

Directors invited the Bank to experiment in co-preparing reports, and to indicate those areas for which it could take responsibility. It was recognized, though, that even with the involvement of other organizations, assessments in non-core areas could likely only be prepared over time, in view of the very different stages of development among the various standards.

Directors took note of the estimates of resource costs in preparing the first and second rounds of case studies, and welcomed the staff’s efforts to prepare the case studies within existing resources. Some Directors indicated that work on standards under way in the context of other Fund initiatives, such as Financial Sector Stability Assessments, could be exploited for the purposes of reports on standards, and that this might provide a source of possible cost savings in future. However, many Directors noted that a major expansion of work on standards would inevitably be costly. Some Directors stressed that, if this work was to be done effectively, it had to be done well, and would therefore have resources implications. Directors also noted that the cost of preparing assessments would likely be higher in countries where the implementation of standards was less advanced, and where staff knowledge of systems and institutional features might be less thorough. They also recognized that the resource costs of future work on standards was likely to be higher as efforts to assess the quality of information increased. A few Directors also pointed to the need to take into account the considerable costs entailed in collaborative efforts with other agencies.

Directors asked the staff to continue experimenting with the modalities involved in preparing reports on the implementation of standards. They agreed that it was appropriate to increase the prominence of standards in surveillance on a selective basis, focusing on countries and/or sectors where the raising of standards and the strengthening of institutions to ensure their implementation are seen as important in limiting the buildup of vulnerabilities, and in promoting better informed investment decisions and better policymaking. A few Directors also stressed the importance of not limiting assessments only to certain groups of countries. Directors considered that ownership by national authorities of recommendations stemming from the assessments was essential to advance effective implementation. A few Directors emphasized that ownership would be maximized if participation in the assessments were voluntary.

Most Directors agreed that publication of reports on standards would be in the best interests of members. However, most Directors also believed that mandatory publication would be counterproductive, as it could deter the assessment of needs and actions on recommendations, and they were therefore of the view that publication should remain voluntary. While agreeing that the decision to publish rested with national authorities, a number of Directors nonetheless considered that a presumption in favor of publication should be established. For those countries choosing to publish, Directors viewed the Fund website as an appropriate venue to disseminate assessments on the implementation of standards, as was the case for the first round of case studies and the description of existing standards.

Directors agreed to take up the issue of the additional resource requirements of further work on assessing standards at the time of the next administrative budget discussions. They agreed to review further the experience with preparing assessments of the implementation and observance of standards in mid-2000, with a short progress report to be presented to the Board before the Spring 2000 Interim Committee meeting.